There are many different types of student loans, all with their own average interest rate. With the COVID-19 pandemic, as of March 13, 2020, interest rates for federally held student loans are set to 0% for at least 60 days to provide borrowers with much-needed relief during the national emergency.
Generally, federal student loan interest rate averages have held stagnant from 2006 to 2020. Prior to COVID-19, the interest rate for undergraduates was 4.79%; for graduate students, the average rate was 6.36%; and for parents and graduate students with PLUS loans, the average interest rate was 7.41%.
In response to COVID-19, the United States government, in addition to providing a 0% interest rate for at least 60 days, is giving borrowers the option to suspend their student loan payments for at least two months. This will provide greater financial flexibility, at a time when businesses are struggling, disrupting the economy and lenders’ ability to make their loan payments, as well as other payments.
Additionally, all federal student loan servicers are granting temporary forbearance to any federal loan borrower who requests it; the forbearance period – lasting at least 60 days – begins March 13, 2020.
Borrowers have also been provided a safety net: there is an automatic suspension of payments for borrowers who are more than 31 days delinquent as of March 13, 2020, or those who become more than 31 days delinquent in their payments.
All U.S. Department of Education (DOE) owned loans will have their interest waved, including:
- Direct Loans
- Federal Perkins Loans
- Federal Family Education Loan Program loans held by DOE
It is important to note that some Perkins Loans are held by academic institutions, and some FFEL Program loans are owned by commercial lenders. These loans are not currently eligible to have their interest fees waived. However, it is possible to consolidate those loans, then making them eligible for 0% interest. The risk in doing so is that once the interest is no longer waved, the interest rate may be higher – and any outstanding interest will be added to your principal balance.
- For loans held by DOE, there is nothing for borrowers to do; accounts will automatically be adjusted, and if you continue to make payments, the full amount will be applied to your principal.
- Payments will remain the same, which will likely make it easier to pay down your balance more quickly during this time period.
- To temporarily suspend payments on loans without being delinquent, you must request administrative forbearance. Your loan servicer will cancel automatic payments, which you will need to restart (they will not resume automatically) when you resume making payments.
- Private student loans are not eligible for this interest waiver.
- For those individuals pursuing Public Service Loan Forgiveness or Income-Driven Repayment (IDR) forgiveness, time spent in administrative forbearance does not count toward the required payments, which may be a disadvantage. With IDR plans, however, you may qualify for a lower payment – even as low as zero dollars – if your income has changed, which will count toward the 120 required payments.
- If you choose to continue making payments, the entire payment will be applied to your student loan principal balance.
- Partial payments will not be penalized when loans are in forbearance.
Specific questions for DOE-owned student loans can be discussed by contacting your loan servicer.
Within the William D. Ford Federal Direct Loan Program, through the U.S. Department of Education (DOE), there are four types of direct loans:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- Direct Consolidation Loans
Each type of loan has a different interest rate. For loans disbursed on or after July 1, 2019, and before July 1, 2020, the interest rates are fixed.
Direct subsidized loans are available to eligible undergraduate students who demonstrate financial need. Each year, students are eligible for up to $5,500, with an interest rate of 4.53% (currently 0%). Typically, students are charged interest after graduation, as long as they remain at least half-time students throughout their schooling.
Direct unsubsidized loans are up to $20,500 annually, at an interest rate of 4.53% (currently 0%) for undergraduate students and 6.08% (currently 0%) for graduate students. Recipients of direct unsubsidized loans must pay interest while they are students and after graduation. With direct PLUS loans, the maximum amount received is the cost of attending the school after all other financial aid is included. Direct PLUS loans have an interest rate of 7.08% (currently 0%).
Direct consolidation loans are loans where all eligible federal student loans have been combined into one through a single loan servicer. This eliminates the need for multiple monthly payments. The DOE allows users to apply without a fee and notes that private companies – without an affiliation with the DOE or the department’s Federal Loan Services – may offer to consolidate loans for a fee.
For the 2019–20 school year, undergraduates are paying an average interest rate for federal student loans of 4.53% (currently 0%). The school year prior, the federal student loan rate was 5.05%, meaning that students are paying less interest now than if they obtained their loans a year ago.
Refinanced student loans can have a fixed interest rate that ranges from 3.29% to 8.07% (though currently 0%), and have a variable interest rate that ranges from 2.43% to 7.79% (though currently 0%).
Federal Loan Eligibility
The Free Application for Federal Student Aid (FAFSA) is filled out by students to determine federal loan eligibility. After you submit your FAFSA, you will receive information about your federal loan availability in conjunction with information about other student loan eligibility from the financial aid office at your school of choice. The financial aid officer will advise you on whether it is in your best interest to accept all or part of the loans available.
Private loans can come from banks, organizations, credit unions, or companies, with varying interest rates.
For the 2019–20 school year, private student loans have a fixed rate that falls between 4.55% and 13.98%, with variable rates that fall between 3.75% and 13.19%.
Private loan terms and conditions can vary and are subject to change at any time. If you accept private loans, you should be diligent about monitoring any changes, and take note of fine print, as the organizations and institutions have the option to change the interest rates and terms of a private loan.
Some well-known private lenders include Ascent, Discover, Commonbond, Sallie Mae, SunTrust, and Wells Fargo. Fixed interest rates vary from a low of 4.22% from Ascent to a high of 13.75% with Suntrust. Variable interest rates with these lenders range from a low of 3.56% at Commonbond to a high of 13.01% at Ascent. As of March 2020, private lenders are encouraging loan holders to contact them with any inquiries.
Calculating the Cost of a Loan
Before taking on debt, it is important to be as educated as possible. One way to be educated about the true cost of a loan is by calculating what the final cost of the loan will be.
For fixed-rate loans, a great tool to use is an amortization table. Fixed-rate loans have the same payment amount each month and the same interest percentage each month for the life of the loan.
The monthly payment is broken down between the interest and the principal, with the interest being paid first. For example, if your loan is $5,000 with a 5% interest rate and a payment of $600 a month, the first payment includes a $250 interest payment and a $350 principal payment. As payments are made, the loan balance will decrease, which will decrease the amount of interest paid, shifting the focus of payments to the principal.
Amortization tables provide a clear view of the breakdown for monthly payments and allow you to calculate the true cost – once interest is added – to a loan. In addition to fixed-rate student loans, loans that can be understood better with an amortization table include auto loans that are typically five years or less, personal loans, and 15- or 30-year home loans.
This amortization table allows you to input the loan type, amount, term, and interest rate. If you are more visually inclined, this calculator creates charts illustrating how a balance decreases over time, while including interest, principal, and balance.
Accepting Financial Aid
Federal Student Aid offers guidelines for accepting financial aid, whether it is federal or private aid. There are three key factors for determining what financial aid is the best to accept.
- First, students should accept free money through grants and scholarships.
- Then, students should accept earned money through programs like work-study.
- Finally, students should accept borrowed money, such as federal student loans.
Some grants and scholarships have special conditions, like maintaining a certain GPA. For example, a grant might turn into a loan if the student does not maintain the conditions in the contract.
Work-study programs allow students to work while they are taking classes in exchange for tuition reimbursement. Work-study programs have proven to be great for learning effective time management.
Federal student loans, both subsidized and unsubsidized, must be repaid with interest. State and college loans also require interest payments and may have additional terms and conditions that vary from those outlined within federal student loan guidelines.
The last choice, Federal Student Aid suggests, is to accept private loans, which often have higher interest rates and terms and conditions that are subject to change.
When taking out student loans, whether private or federal, it is important to remember that borrowing should be done responsibly. Loans are an investment in your future, and meticulous records will help you to keep track of how much you are borrowing. Eventually, you will have to repay your loans, so having accurate records will be helpful for determining how much you can afford to repay.
Payments must be made on time – even without a reminder, bill, or repayment notice – to fulfill your obligation to repay your loan. Additionally, you must pay at least the minimum amount each month.
If you transfer schools, change your name, address, or Social Security number, withdraw from school, drop below half-time status, or graduate, it is important to notify your loan servicer to determine the next steps and ensure that your loan is kept in good standing.
Average student loan interest rates are just that, an average. Different types of loans offer different interest rates based upon personal circumstances, the duration of the loan, whether the loan is public or private, and whether the loan is subsidized or unsubsidized. At CollegeFinance, we offer tools and assistance to help navigate the decision-making process when accepting loans. Turn to our experts for any questions you have, and rest assured you’ll make the right financial decision for your future.